The Securities and Exchange Commission launched a vast investigation into cryptocurrencies and initial coin offerings (ICOs) Wednesday, issuing multiple subpoenas and formal information requests to technology firms and advisors engaged in creating and marketing the offerings.
The probe turns up regulatory heat on the highly volatile market for digital tokens, which topped some $700 billion in January, the Wall Street Journal was first to report.
A one-day loss in January of more than than $108 billion by bitcoin and other digital currencies is fueling regulators’ fears.
The SEC did not respond to a request for comment on the investigation, but sources familiar with the probe said SEC Chairman Jay Clayton is driving the SEC to get out in front of the red-hot market. “It’s no surprise that Clayton is horrified about what a complete meltdown that will cost,” said one securities attorney who asked for anonymity.
The flurry of SEC subpoenas, which is said to be ongoing, is asking for information about sales and pre-sales of the ICOs, which are not governed by the rules that govern standard public offerings.
ICOs, which can be created to crowd fund everything from space technology to marijuana farming equipment, are specifically used by start-ups to bypass the intense regulation of the capital-raising process. Typically, ICO campaigns sell cryptocurrency to early investors in a project in return for legal tender or other cryptocurrencies. Based on the promise of success of an idea that may or may not materialize, the tokens have been seen to soar or tank by as much as 25 percent in minute-by-minute trading.
“The SEC will vigorously pursue those who seek to evade the registration, disclosure and antifraud requirements of our securities laws,” Clayton and Commodities Futures Trading Commission Chairman J. Christopher Giancarlo said in a Wall Street Journal op-ed in January. “The SEC is monitoring the cryptocurrency-related activities of the market participants it regulates, including broker-dealers, investment advisers and trading platforms,” the top regulatory cops said.
The SEC is devoting a significant portion of its resources to the ICO market, Clayton added. “Market participants, including lawyers, trading venues and financial services firms, should be aware that we are disturbed by many examples of form being elevated over substance, with form-based arguments depriving investors of mandatory protections.”